Kira M. Slawson (7081)
BLACKBURN & STOLL, L.C.
Attorneys for Carbon/Emery Telcom, Inc.
257 East 200 South, Suite 800
Salt Lake City, Utah 84111
Telephone: (801) 521-7900
______________________________________________________________________________
BEFORE THE PUBLIC SERVICE COMMISSION OF UTAH
______________________________________________________________________________
IN THE MATTER OF
CARBON/EMERY TELCOM, INC.’S
APPLICATION FOR AN INCREASE
IN UTAH UNVERSAL SERVICE
FUND SUPPORT
CARBON/EMERY TELCOM, INC.’S
MEMORANDUM IN SUPPORT OF
MOTION FOR PARTIAL SUMMARY
JUDGMENT
DOCKET NO. 15-2302-01
______________________________________________________________________________
Pursuant to the Utah Public Service Commission’s (the “Commission”) administrative
rules R746-100-1.c and R746-100-3.J and Rules 7 and 56 of the Utah Rules of Civil Procedure,
Carbon/Emery Telcom, Inc. ("Carbon/Emery") hereby files this Memorandum in Support of its
Motion for Partial Summary Judgment filed contemporaneously herewith. In the Testimony of
Bion C. Ostrander and David Brevitz filed by the Office of Consumer Services (the “Office”) in
this docket, the Office has asked the Commission to adjust and allocate fiber/internet related
common costs from Carbon/Emery to its non-regulated affiliate for the affiliate’s use of
Carbon/Emery’s plant to provide internet service to the affiliate’s retail customers. (See
Testimony of Ostrander, lines 264-267). As a matter of law, as demonstrated herein, the
Commission is preempted from making this allocation adjustment.
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STATEMENT OF MATERIAL UNDISPUTED FACTS
1.
Carbon/Emery is deploying fiber to the home (“FTTH”) facilities within its
service territory. (Testimony of Brevitz, OCS-3D, lines 317-319).
2.
FTTH local distribution facilities (connections to end-user customers) support
multiple services. (Testimony of Brevitz, OCS-3D, lines 343-344; Rebuttal Testimony of D
Meredith, lines 463-467).
3.
Carbon/Emery’s FTTH facilities support basic voice (including long distance),
video services, and broadband internet. (Testimony of Brevitz, OCS-3D, lines 351-359).
4.
The Carbon/Emery FTTH network is jointly used for regulated and nonregulated
retail services, and by regulated and nonregulated entities. The non-regulated entities and third
parties “use” the Carbon/Emery FTTH network by purchasing Wireline Broadband Internet
Access Service (“WBIAS”), a regulated interstate service, from Carbon/Emery which the nonregulated affiliates or third parties then use to provide their non-regulated service to their end
users. (Testimony of Brevitz, OCS-3D, lines 359-361; Rebuttal Testimony of Douglas
Meredith, Lines 501-507).
5.
The Federal Communications Commission has determined that when an end-user
adds broadband service to an existing local exchange service (such as a bundle of regulated voice
service and an affiliate’s unregulated broadband service), the regulated entity such as
Carbon/Emery shall assign 25 percent of the FTTH loop cost to the interstate jurisdiction and
receives cost recovery for this interstate service through various interstate mechanisms. If an
end-user only wants broadband service with no voice component, then 100 percent of the FTTH
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loop cost is assigned to the interstate jurisdiction where Carbon/Emery recovers the cost through
special access service prices. (Rebuttal Testimony of D Meredith, Lines 521-527).
6.
The Office seeks to allocate 50 percent of Carbon/Emery’s “intrastate”
fiber/internet-related common plant costs and related expenses to its nonregulated affiliate.
(Testimony of Ostrander, OCS-1D, lines 411-414).
7.
Carbon/Emery offers to the public access to its FTTH infrastructure under Title II
of the Communications Act of 1934, as amended, under a common carriage obligation. Any
provider may purchase WBIAS as a wholesale component of its Internet/Video/VoIP offering to
the public. (Rebuttal Testimony of D Meredith, Lines 480-498).
ARGUMENT
Pursuant to Rule 56(c) of the Utah Rules of Civil Procedure, summary judgment shall be
granted if “the pleadings, depositions, answers to interrogatories, and admissions on file, together
with the affidavits, if any, show that there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.” Utah R. Civ. P. 56(c).
The material facts to this discussion are set forth above, and are not in dispute. The
question is whether the cost allocation adjustment requested by the Office is preempted by
federal law; and this is a question of law. As discussed below, as a matter of law, this
Commission is preempted from adopting the Office’s FTTH loop cost allocation adjustment
because it would be a de facto jurisdictional separation performed by the state for the purpose of
assigning additional costs to an interstate service regulated by the FCC. This is inconsistent with
the jurisdictional separation process established exclusively by the FCC.
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A.
Jurisdictional Separations Process.
According to the Federal Communications Commission, “jurisdictional separations is the
process of apportioning regulated costs between the interstate and intrastate jurisdictions.”
(https://www.fcc.gov/encyclopedia/jurisdictional-separations). The FCC states:
The primary purpose of separations is to determine whether a local exchange carrier
(LEC)'s cost of providing regulated services are to be recovered through its rates for
intrastate services or through its rates for interstate services. The first step in the current
separations process requires carriers to apportion regulated costs among categories of
plant and expenses. In the second step of the current separations process, the costs in each
category are apportioned between the intrastate and interstate jurisdictions. Once costs
are separated between the jurisdictions, carriers can then apportion their interstate
regulated costs among their interexchange services and their intrastate costs among
intrastate services. (Id.)
As a practical matter, incumbent local exchange carriers (LECs), like Carbon/Emery
record their costs pursuant to Part 32 of the FCC’s regulations. 47 C.F.R. §32. These costs are
then divided between regulated and unregulated costs pursuant to Part 64 of the FCC’s
regulations. 47 C.F.R. §64. Because a LEC’s assets may be used for interstate and intrastate
purposes, the FCC endorsed a cost-based methodology “designed to attribute with some
precision the costs utilities incur to their appropriate interstate or intrastate source.” (Crockett at
1566). This cost-based methodology was codified by the FCC in 47 C.F.R. Part 36.
Under Part 36, incumbent LECs perform a two-part jurisdictional separations process.
First, incumbent LECs assign regulated costs to various categories of plant and expenses1.
Second, the costs in each category are apportioned between the intrastate and interstate
1
Costs may be further disaggregated among service categories. See 47 C.F.R. §36.123.
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jurisdictions based upon either a relative use factor, a fixed allocator, or by direct assignment,
when specifically allowed in the Part 36 rules.
In 1980, the FCC limited the interstate share of common non-traffic sensitive loop costs
to 25 percent. Under separations rules, the “gross allocator” assigns 25 percent of each carrier’s
loop costs to the interstate jurisdiction. 47 C.F.R.§36.2. Additionally, under 47 U.S.C. §410(c),
the FCC is required to refer any proceeding regarding the jurisdictional separations of common
carrier property and expenses between interstate and intrastate operations which the FCC may
seek to institute pursuant to a notice of proposed rulemaking to a Federal-State Joint Board.
In 1997, the FCC initiated a proceeding seeking comment on the extent to which
legislative, technological, and market changes warranted comprehensive reform of the
separations process. In the context of that proceeding, the Federal-State Joint Board
recommended that, until comprehensive reform could be achieved, the FCC should freeze Part
36 allocation factors for incumbent LECs subject to rate-of-return regulation. The FCC adopted
this freeze and has renewed the freeze several times since 2001. Most recently in 2014, the FCC
extended the freeze of Part 36 allocation factors for incumbent LECs subject to rate-of-return
regulation through June 30, 2017.
B.
Jurisdictional Separations in Carbon/Emery.
In this Docket, the Office seeks an adjustment to Carbon/Emery’s allocation of its FTTH
facilities costs based on the argument that Carbon/Emery’s FTTH facilities are used for both
interstate and intrastate services, and that Carbon/Emery has not properly allocated fiber and/or
internet related common costs to its non-regulated affiliate who provides broadband/internet
operations over the FTTH facilities. The Office seeks the allocation adjustment “to properly
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allocate costs” between the regulated and non-regulated entities for regulatory purposes. The
Office expert contends that he is allocating and removing 50 percent of the “intrastate” only
portion of the common fiber costs from Carbon/Emery’s regulated operations, and that this
reasonable since he is not allocating “any additional interstate fiber common costs” to the
nonregulated affiliate. (Emphasis added)(Testimony of Ostrander, OCS-1D, lines 602-608).
However, this position is not supported by law.
It is undisputed that Carbon/Emery’s FTTH facilities in question are used to provide both
intrastate and interstate service. Therefore, some system for apportioning costs and investments
is necessary to set fair rates for the respective interstate and intrastate services. See generally,
MCI Telecommunications Corp. v. FCC, 750F.2d 135 (D.C. Cir. 1984). In fact, as stated by the
Ninth Circuit Court in Hawaiian Telephone Company v. PUC “when the same plant and
equipment is used to provide both interstate and intrastate services and different authorities set
rates for these respective services, cost and investment must be apportioned uniformly in order to
establish fair rates.” Hawaiian Telephone Company v. PUC, 827 F.2d 1264, 1275 (9th Cir. 1987).
It is also undisputed that the wholesale service used by Carbon/Emery’s non regulated
affiliate is an interstate service that Carbon/Emery must offer to all parties. This service is a
Title II regulated service with attendant common carriage obligations.
C.
The Utah Public Service Commission is preempted by Federal Law from
removing reasonable intrastate costs for FTTH facilities from
Carbon/Emery’s rate base.
Pursuant to 47 U.S.C. §§151, 152(a), the FCC has exclusive jurisdiction to regulate
interstate common carrier services, including the setting of rates. Further, the Communications
Act empowers the FCC to prescribe uniform separations procedures, and authorizes the FCC to
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determine what portion of the carrier’s property shall be apportioned between state and federal
jurisdictions. See 47 U.S.C. §221(c).
As indicated above, it is undisputed that Carbon/Emery is a rate-of-return incumbent
local exchange carrier that offers WBIAS, including Digital Subscriber Line service (DSL), to its
affiliates and other third parties as a wholesale interstate service. Retail providers order WBIAS
from Carbon/Emery and then package this wholesale access service with their own services or
products to offer to their end-user customers. WBIAS is an interstate service that is regulated by
the FCC. Thus, the FCC is responsible for determining the interstate costs that account for the
use of FTTH loop plant when providing WBIAS.
The FCC, in Part 36, has determined that when an end-user adds broadband service to an
existing local exchange service (such as a bundle of regulated voice service and an unregulated
broadband service), the regulated entity such as Carbon/Emery shall assign 25 percent of the
FTTH loop cost to the interstate jurisdiction and receives cost recovery through various interstate
mechanisms. If an end-user only wants broadband service with no voice component, then 100
percent of the FTTH loop cost is assigned to the interstate jurisdiction where Carbon/Emery
recovers the cost through special access service prices.
It is undisputed that Carbon/Emery has allocated the FTTH loop costs in compliance with
Part 36 as set forth above (25 percent of the FTTH loop costs to the interstate jurisdiction when
the end-user added broadband to an existing local exchange service and 100 percent of the FTTH
loop costs to the interstate jurisdiction if the end-user ordered stand-alone broadband service).
The Office, however, wants to exclude an additional 50 percent of these FTTH loop costs and
expenses from the intrastate costs and assign them to a non-regulated affiliate after the 25
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percent allocation of loop costs to the interstate jurisdiction has been made. This “reallocation”
or “removal” would effectively eliminate this portion of the intrastate costs of plant and expenses
from the rate computations of either the Utah Commission or the FCC. This is not permitted.
As set forth above, there is considerable legal guidance on the separation of costs
between interstate and intrastate jurisdictions. The Supreme Court established that this
separation is “important not simply as a theoretical allocation of the two branches of the
business. It is essential to the appropriate recognition of the competent governmental authority in
each field of regulation.” Smith v. Illinois Bell Telephone Co., 282 U.S. 133, 148 (1930). The
Communications Act of 1934, as amended empowers the FCC to prescribe uniform separations
procedures. Illinois Bell Telephone Company v. Illinois Commerce Commission, 740 F.2d 566,
567 (7th Cir. 1984). The FCC has prescribed uniform separation procedures in 47 C.F.R. §36.
The State of Utah cannot abrogate the FCC’s uniform separation procedures in its state
ratemaking process. Rather, as recognized in Louisiana Public Service, 106 S. Ct. 1890, 1902
(1986), it is only after a uniform separations of costs has been applied that a state’s independent
rules for intrastate ratemaking can be protected from federal preemption. Additionally, as
indicated by the D.C. Circuit Court in the Crockett case:
The Part 36 cost-based separations rules do affect state ratemaking authority to the extent
such rules apply to the telephone companies within their jurisdictions. Although each
state has great freedom to regulate intrastate rates, once the FCC has applied its
jurisdictional separation, that part of the cost base deemed to be interstate is outside the
jurisdictional reach of the state regulatory agency.” Crockett at 1567, citing Hawaiian
Telephone Company v. Public Utilities Commission of Hawaii,827 F.2d 1264, 1275 (9th
Cir. 1987).Crockett at 1567, citing Smith v. Illinois Bell, 282 U.S. 133, 150 (1930).
Thus, as demonstrated herein, once a jurisdictional separation of costs has been made by the
FCC for interstate services offered under common carriage, this Commission, or any state
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Commission for that matter, is preempted from assigning more costs to the interstate jurisdiction
or to interstate services. This is more particularly explained by the Hawaiian Telephone
Company Court as follows:
If the sum of the intrastate and interstate portions for rate-base allocation purposes were
not 100 percent, some costs of plant and expenses would not be included in the rate
computations of either [the PUC or the FCC] and the carrier may be deprived of a fair
rate of return when interstate and intrastate jurisdictions are both taken into account.”
Hawaiian Telephone Company at 1275, citing Application of Hawaiian Tel. Co, 689 P.2d at
751-52, quoting New England Tel. & Tel. Co. v. Public Utilities Comm’n, 448 A.2d 272, 298
(ME 1982). As stated by the Ninth Circuit court in the Hawaiian Telephone Company case, the
question is not whether federal separation procedures preempt state ratemaking, but rather
“whether federal separations procedures preempt any inconsistent separations adopted, openly or
otherwise, by the state for the purposes of establishing the intrastate ratebase.” Hawaiian
Telephone Company at 1275.
The position of the Office in this case is very similar to the position of the Public Utilities
Commission and the Consumer Advocate in the Hawaiian Telephone Company case. In
Hawaiian Telephone Company, the Hawaiian Public Utilities Commission (PUC) and the
Consumer Advocate sought review of the judgment of the United States District Court (Hawaii)
which issued an injunction requiring the PUC to obey an FCC order that mandated the use of a
particular set of jurisdictional separations procedures for the allocations of costs and investment
between intrastate and interstate telephone operations. By way of background, in 1972 the FCC
determined that Hawaii’s interstate rates should be integrated into the mainland domestic rate
pattern. The FCC did not prescribe any separations procedures for Hawaii at that time, rather the
Hawaii PUC apportioned costs between interstate and intrastate jurisdictions according to its
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own “plan”. Subsequent to 1972, the FCC decided that Hawaii’s integration into the mainland
domestic rate pattern should be accomplished by establishing new procedures for interstate and
intrastate cost apportionment. The FCC exercised its authority under 47 U.S.C.§410 and
established a Federal-State Joint Board to advise it on fair jurisdictional separation procedures
for Hawaii. In 1981 the Joint Board recommended use of the separations procedure which was
developed through the cooperative efforts of the FCC and utility regulators nationwide, and
which had been used in the 48 states for some time. The “Ozark Plan”, as it was called, was
codified in 47 C.F.R. §67.1-67.701. The FCC ordered Hawaii to use the Ozark Plan for
determination of its interstate and intrastate jurisdictional separations. However, when Hawaiian
Telephone Company applied for a rate increase, the Hawaiian PUC initially used the Ozark Plan
to calculate rates, but then adjusted the rates downward by 1.1 percent. The District Court found
that this “adjustment” was “a fairly transparent and improper attempt to circumvent the FCC
mandate” regarding appropriate jurisdictional separations. As stated by the Hawaiian
Telephone Company court, “The Supremacy Clause does not countenance state policies—in this
case a state ratemaking ruling—that may produce results inconsistent with the objectives of a
federal statute.” Hawaiian Telephone Company at 1277, citing Maryland v. Louisiana, 451 U.S.
725 (1981).
In the Carbon/Emery Docket, it is undisputed that the federally mandated interstate
allocation for FTTH loop costs is 25 percent, and that Carbon/Emery has complied with this Part
36 requirement. With its proposed allocation adjustment, the Office is not suggesting that the
FTTH costs and expenses incurred by Carbon/Emery are not reasonable, or are too high. Rather,
the Office presumably concedes that the FTTH costs and expenses are reasonable, but
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nevertheless excludes an additional 50 percent of those costs from Carbon/Emery’s intrastate rate
base. The Office claims that this allocation adjustment only allocates a portion of
Carbon/Emery’s intrastate fiber/internet related common costs to a non-regulated affiliate, and
does not allocate any interstate costs, but this is not accurate. Rather this allocation adjustment,
like the PUC’s adjustment in Hawaiian Telephone Company, is a thinly veiled attempt to depart
from the required separation of plant and expenses between interstate and intrastate use. In fact,
the Office’s proposed adjustment/allocation is made precisely because Office thinks that the
interstate proportion of the costs set by the FCC at 25 percent is too low. This is not permissible
under federal law. The FCC separations procedures authorized by 47 U.S.C. §410(c) and set
forth in 47 U.S.C. §36 bind the states. Hawaiian Telephone Company at 1276, referring to
Louisiana Public Service Comm’n v. FCC, 106 S.Ct. 1890 (1986). Therefore, this Commission
is precluded from accepting the “intrastate fiber/internet-related common cost” adjustment
proposed by the Office because it directly conflicts with federal jurisdictional separations law,
and as such, is preempted by federal law.
CONCLUSION
In the Testimony of Bion C. Ostrander and David Brevitz filed by the Office of
Consumer Services (the “Office”) in this docket, the Office has asked the Commission to adjust
and allocate fiber/internet related common costs from Carbon/Emery to its non-regulated affiliate
for the affiliate’s use of Carbon/Emery’s plant to provide internet service to the affiliate’s retail
customers. This proposed allocation conflicts with Part 36 of the FCC regulations and, thus is
preempted under federal law. Carbon/Emery is entitled to partial summary judgment on this
legal question.
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Dated this 11th day of September, 2015.
BLACKBURN & STOLL, LC
____________________________________
Kira M. Slawson
Attorneys for Carbon/Emery Telcom, Inc.
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CERTIFICATE OF MAILING
I hereby certify that a true and correct copy of the Carbon/Emery Telcom, Inc.’s Motion
for Partial Summary Judgment, Docket No. 15-2302-01 was sent to the following individuals by
email and/or mailing a copy thereof via first-class mail, postage prepaid (as indicated), this 11th
day of September, 2015:
Justin Jetter
Assistant Attorney General
Division of Public Utilities
jjetter@utah.gov
Chris Parker
William Duncan
Dennis Miller
Joseph Hellewell
Paul Hicken
Division of Public Utilities
chrisparker@utah.gov
wduncan@utah.gov
dennismiller@utah.gov
jhellewell@utah.gov
phicken@utah.gov
Robert Moore
Assistant Attorney General
Office of Consumer Services
rmoore@utah.gov
Michele Beck
Danny Martinez
Office Of Consumer Services
mbeck@utah.gov
dannymartinez@utah.gov
Bion C. Ostrander
Ostrander Consulting
bionostrander@cox.net
David Brevitz
Ostrander Consulting
davidbrevitz@att.net
_________________________________
Kira M. Slawson
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